Walmart Pricing Spineometer: 5 of 5 Vertebrae

Walmart, a global grocer and general merchandiser, had a positive Q3 2023. Revenue rose 5.2% to $161 billion and earnings before interest and taxes rose 130% to $6.2 billion over the same period last year.

A review of Walmart’s 16 November earnings call and financial report provided insight regarding the importance of pricing on performance.

Douglas McMillon, CEO of Walmart, is clear that Walmart places a high priority on pricing, specifically low prices. “Everyday low prices are a foundational component of us fulfilling our purpose. … We’re the place to come because we have the right product, at the right price.”

To deliver low prices profitably, Walmart is hyper-concentrated on cost control and productivity improvements.  Executives drew attention to their successes with the Spark Driver platform to reduce store-to-home delivery costs by 15%, to the Market Fulfillment Centers in improving service quality and reducing costs, to Regional Distribution Centers in improving logistics and costs, and to automation as well in its contribution to reducing costs.

Douglas McMillon discussed the current economic environment in detail.  “In the US, pricing levels in many food categories continue to be a concern. Overall, our product costs are up versus last year. And they remain up even more on a two-year stack, which is putting pressure on our customers. Beef prices are high, but we’re happy to see lower pricing in dairy, on eggs and with chicken and seafood. The other good news is that general merchandise prices continue to come down. GM is down low to mid-single digits versus last year. That enables us to roll back pricing, which will help our customers. In the US, we may be managing through a period of deflation in the months to come. And while that would put more unit pressure on us, we welcome it, because it’s better for our customers.”

John David Rainey, CFO of Walmart, echoed an emphasis on managing during the current economic situation.  “Walmart US gross margins increased 5 basis points, reflecting lower markdowns and supply chain costs, but we’re still seeing ongoing category mix pressure, as health & wellness and grocery sales outperformed general merchandise. Continued disinflation, along with the success of our merchants at Sam’s Club in bringing down the cost of inventory.”

Senior executives are also well informed of the impact of pricing on volume.  Douglas McMillon said, “[T]he first question is about units and general merchandise. And as prices have come down, are we seeing elasticities in units go up.”

(I am not confident Douglas McMillon is using the word “elasticities” in alignment with the economic definition of this term, but I do believe he firmly understands the concept, and many executives in consumer markets use similar linguistically challenging phrasing.) 

As if cost reduction and economic cycles weren’t enough, Walmart executives also place a high priority on operational effectiveness through cycles of planned and unplanned challenges.  On the planned side, sequences of Singles Days 11/11, Halloween, All Saints Day, Diwali, Thanksgiving, New Year (Both Western and Chinese), Christmas, and other holidays across their geographic footprint, Walmart executives praised their team on delivering to customers’ needs.  On the unplanned side, Douglas McMillon praised his team for their work through Hurricane Otis in Mexico, political unrest, and other storms.

Avoiding the quagmire of culture wars, Douglas McMillon stated “We care about everyone. We want to be a place where literally everyone feels comfortable and welcomed to shop or work.”

Pledging to deliver low prices is not the same as ignoring the need for pricing capability.  Having a cost focus, operational excellence, and managing economic cycles does not reduce the need for good pricing.  In fact, it requires good pricing to ensure sufficient margins to drive the “flywheel” and ensure the ability to compete in the next economic cycle.

Industry benchmarks suggest Walmart would have 1,000 to 6,000 professionals working in pricing out of its 2.1 million associates.  Given the pricing challenges Walmart engages, we would expect the pricing professional count to come in at the lower end of this range, if not slightly below it.  We would expect pricing professionals in multiple divisions (Walmart, Sam’s Club, Flipkart), and in multiple geographies (U.S. Canada, Mexico, Chile, India, China, etc.) and with multiple skill sets (analytics, new offers, competitive intelligence, etc.)

Research into the investment by Walmart in pricing yielded highly encouraging results.  After identifying over 100 individuals focused on customer pricing (not transfer pricing) at Walmart, we gave up.  We suspect Walmart is near the industry benchmark for pricing talent.  As for pricing software, we suspect Walmart is focused on proprietary solutions to their needs based on their acquisition of Flipkart and other data.  Pricing professionals at Walmart range in title from analyst and leader to manager and director.  Senior Director was the highest level identified.  Their range of focus included data analytics, merchandising, eCommerce, apparel, pharmaceutical, grocery, beverages, and other categories.  A few were dedicated to strategy.

An organizational function with this responsibility and size should include a vice president.  And, given the role of economics on performance, perhaps a small applied economics team would be useful as well. I know many peer companies, as well as Walmart’s suppliers, were caught flat-footed in pricing when the pandemic hit.  Soothsayers and predictors of economic impacts can be helpful.  It is entirely possible that both of these issues are addressed at Walmart, and it is our research that is lacking.

Given the importance and capability of pricing at Walmart as indicated in financial reports, management statements, and our pricing team research, and given their performance, we have come to the following conclusion as of January 2024.

Walmart Pricing Spineometer: 5 out of 5 Vertebrae.

WMT (Walmart Inc.) fell from 169 the day prior to their earnings call to 155 one week later. FY 2023 revenue of $611 billion with a 3.3% operating margin and P/E ratio near 25.

For FY 2023, a 1% improvement in price would yield a 30 % improvement in operating profits holding all else constant at Walmart.